REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.   7253          OF 2008 [Arising out of SLP (Civil) No. 9411 of 2006]

Bihar State Financial Corporation …Appellant

Versus

M/s. Chhotanagpur Minerals and Ors. … Respondents

J U D G M E N T  

S.B. SINHA, J :

1. Leave granted.

2. Appellant  is  a  Corporation  constituted  under  the  State  Financial

Corporations Act, 1951 (for short “the Act”).  Respondent No. 1 intended to

set up a factory in the Industrial Area, Kokar in the town of Ranchi.  It, on

or  about  5.11.1976,  for  the  aforementioned  purpose,  sought  for  and was

granted loan by the appellant for a sum of Rs. 3.36 lakhs.  

3. An agreement was entered into by and between the parties, in terms

whereof,  the  respondent  no.  1  mortgaged  the  properties  described  in

Schedules ‘A’, ‘B’ and ‘C’ thereof in favour of the appellant – Corporation,

viz.,  the lease hold right  over a piece of  land admeasuring 0.56 acres at

Village Kokar.   

4. In terms of the said deed of mortgage, the plaintiff was required to

liquidate the aforementioned amount of loan in fourteen instalments.  The

interest payable thereupon was 14.25 per cent per annum payable every six

months.  Indisputably, the plaintiff refunded a sum of Rs. 1,32,000/- out of

the total sum received from the appellant, viz., Rs. 3,34,300/-.  The plaintiff

installed  machineries  upon  construction  of  buildings  over  the  plot.   The

factory started operation  from the month  of  November,  1978.   However,

admittedly the  factory was  closed  in  March,  1982  for  one  reason or  the

other.

5. Inter alia on the premise that the plaintiff failed and/ or neglected to

pay  amount  of  loan  in  the  manner  specified,  a  proceeding  in  terms  of

Sections 29 and 30 of the Act was initiated by the appellant on or about

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7.12.1981.   Advertisements  were  issued  for  selling  the  factory  on

16.12.1982  and  12.01.1983.     However,  no  bid  was  received  pursuant

thereto and in furtherance thereof.  

6. A decision was taken to sell the said properties in favour of one Shri

Atma Lal Agrawal, respondent  No. 2 herein.   Plaintiff  was not  informed

thereabout.   According to  the plaintiff,  the  said  sale  was conducted  in  a

hush-hush manner.  In disposing of the said property, the appellant did not

keep in mind the interest of the plaintiff at all.  The factory premises was

handed over to the respondent No. 2 for which an inventory was prepared

on 16.02.1983 which is to the following effect:

“(A) PLANTS MACHINERY (1) 312  (3-Roller)  Raymond Mill  Plant  for

Veeorope  drive  but  without  Motor  and started complete with and Air-classifier.

(2) Jaw crusher – without Motor (3) Blower 1 No. (4) Disintegrator without Motor

1 No. (5) Electrical  installation  with  starter  &

switch…”

7. Indisputably,  in  the  said  factory,  the  plaintiff  had  other  properties

which were not  the  subject  matter  of mortgage.   It  is  furthermore not  in

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dispute that the plaintiff had taken a working capital loan for a sum of Rs.

1,60,000/- from the State Bank of India, Respondent No. 3 herein.  Various

immovable properties including liquid assets and stock were hypothecated

in its favour.  The purchaser allegedly utilised the said materials.  Plaintiff

thereafter  filed  a  suit  being  Money Suit  No.  9  of  1984  in  the  Court  of

Subordinate  Judge  –  IV Ranchi  wherein  originally  the  following  reliefs

were prayed for:

“A. That a decree for the payment of a sum of Rs. 1,87,635.24 (One lac eight, seven thousand six hundred thirty five and twenty four paise) by way of  damages  as  detailed  in  Schedule  “A”  of  the plaint be passed against the defendant no. 1 & 2.”

8. However, the plaint  was later on amended and the following relief

was added:

“A decree for a sum of Rs. 1,86,934.46 paise be passed  against  the  defendant  No.  1  being  the wrongful and deliberate loss caused to the plaintiff as specified in Schedule “B”, “C” and “D” of the plaint.”

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9. Appellant  in  its  written  statement  inter  alia  contended  that  it  had

exercised its power bona fide in terms of Sections 29 and 30 of the Act.  It

furthermore  contended  that  despite  service  of  notice  upon  the  Bank  the

movable properties having not been removed from the factory premises, the

appellant was not liable to pay any damages.   

10. The learned Trial Judge, having regard to the pleadings of the parties,

inter alia framed the following issues:

“1. Has the  plaintiff  any valid cause of action for the suit? 2. Is the suit as framed maintainable under the law? 3. Is  the  suit  bad  U/s  46(b)  of  the  State Financial Corporation Act? 4. Have the defendants taken and removed the movable properties which were not mortgaged to the corporation illegally and unauthorisedly? 5. Is  the  sale  conducted  by  the  Corporation defendant  no.  1  in  favour  of  defendant  no.  2 bonafide and legal one? 6. Whether the plaintiff is entitled to damages for  valuing  the  mortgaged  properties  by  the defendants? 7. Whether  plaintiff  is  entitled  for  decree  as prayed for? 8. To what relief or reliefs, if any, the plaintiff is entitled?”

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The learned Trial Judge held:

“…The Branch Manager B.B. Singh has admitted in his evidence that nobody was present on behalf of plaintiff at the time of preparation of inventory vide  para  13  and  15  and  it  falsified  the  written statement  of  defendant  no.  2  about  presence  of Pradeep  Modi  at  the  time  of  preparation  of inventory.  The documentary and oral evidences of plaintiff  and  defendants  fully  support  that inventory Ext. B is not a reliable document at all and  has  not  been  correctly  and  impartially prepared and it is incomplete.

The  defendant  no.  2  had  purchased  the mortgaged  assets  of  plaintiff  only  vide  Ext.  7/4 and  hence  defendant  no.  1  and  defendant  no.  2 committed  a  wrong  in  taking  possession  of  raw materials,  finished  goods,  spares  etc.  on  16.2.83 which were not subject matter of sale to defendant no. 2 and on those account defendant no. 1 and 2 are  liable  to  pay  damages  to  the  plaintiff  as claimed by plaintiff.  Thus, issue no. 4 is decided in favour of plaintiff against defendant no. 1 and defendant no. 2.”

It was furthermore held:

“…The plaintiff  is  not  entitled  to  decree  against bank defendant No. 3.  The plaintiff is also entitled for interest at a rate of 13% per annum pendente lite and future till realization.  Thus, it is ordered that the suit be and the same is decreed for a sum of  Rs.  1,87,635.24  p  (One  lac  eight,  seven thousand six hundred thirty five and twenty four paise) for claim of relief no. A on contest against defendant no. 1 and against defendant no. 2 with

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cost also with interest at a rate of 12% per annum pendente  lite  and  future  till  realization.   The plaintiff may recover the aforesaid amount jointly or  severally from defendant  no.  1  and defendant no. 2.

The  suit  is  decreed  for  a  sum  of  Rs. 1,85,934.46 (One Lack Eighty Six Thousand Nine Hundred Thirty Four and paise forty six only) for claim  in  relief  no.  A-1,  on  contest  against defendant no. 1 with cost along with interest at a rate of 12% per annum pendente lite and future till realization.  The suit for claim of relief no. A-1 is dismissed  against  defendant  no.  2.   The  suit  is dismissed exparte against defendant no. 3.”

11. Aggrieved by and dissatisfied with the said judgment and decree, the

appellant  preferred  an  appeal  before  the  High  Court.   By reason  of  the

impugned judgment, the said appeal has been dismissed.

12. The High Court in its judgment framed the following three points for

consideration:

“Whether  the  appellant  removed  the  movable properties  not  mortgaged  to  the  Corporation illegally  or  unauthorisedly?  Whether  the  sale conducted  by  the  Corporation,  defendant  – appellant,  in  favour  of  the  defendant  no.  2 bonafide  and  legal  one,  and  whether  plaintiff  –

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respondent is entitled to damages for undervaluing the mortgaged properties by the defendants?

The High Court held that the appellant  broke open the door of the

factory in absence of any representative of the plaintiff.  Inventory of the

articles was also prepared without any representative of the plaintiff.  The

inventory list of machineries which were in the factory premises was handed

over to the defendant No. 2.  The plea of the appellant that there was no

movable property in the factory premises was disbelieved.  Indisputably, the

properties which were hypothecated to the State Bank of India, respondent

No. 3 were also lifted without any information to the State Bank of India.

The  first  point  was,  thus,  determined  in  favour  of  the  plaintiff  –

respondent No. 1.  As regards points No. 2 and 3, the High Court opined:

“31.  A  plea  has  been  taken  on  behalf  of  the appellant Atma Ram who has filed F.A. No. 22 of 1994  against  the  judgment  and  decree  of  the learned court below that he is not at fault, rather he is at loss on account of the fact that prior to the sale  of  the  factory,  some  machines  had  been removed from the factory just before the take over of  the  factory.   But  question  is  that  before purchase  of  the  factory  by  him,  he  entered  into

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negotiation  with  the  Branch  Manager  of  Bihar State  Financial  Corporation  Ranchi  and  had agreed to purchase the factory at the price agreed upon in between him and the Branch Manager and before  purchase,  it  cannot  be  believed  that  he purchased the factory without  going  through the premises of the factory.  Further, he did not appear or take part  in the tender that was opened at the head office  of  Bihar  State  Financial  Corporation and Bihar State Financial Corporation also when no  tender  was  filed,  should  have  re-issued  the tender  and  from  the  evidence  of  the  Branch Manager,  defendant  No.  1  obtained  permission from the head office at Patna for approval of sale and in course of time, sale was approved.  While deciding issue no. 2, it was found that Bihar State Financial  Corporation  did  not  conduct  sale  in proper manner and did not fetch proper price for the  factory  worth  which  the  factory  was  in possession of defendant  no. 1 and, therefore, the question  of  removal  of  articles  from the  factory premises  by  the  plaintiff  –  respondent  does  not arise,  although  an  F.I.R.  to  that  effect  has  been lodged  against  the  plaintiff  –  respondent  and  a case in this connection is said to be pending.  But the  sale  which  was  conducted  by  the  defendant No. 1 appellant was not conduct in a proper way and there was collusion in between the defendant no.  1  and  defendant  no.  2,  so  ignoring  all  the norms, the sale was conducted and as such, both defendant  no.  1  and  defendant  no.  2  are  liable, and,  therefore,  the  learned  court  below  gave  a finding  against  the  defendant  no.  2  holding  the defendant  no.  1  –  appellant  of  F.A.  No.  531  of 1993  responsible  for  the  loss  of  the  property  as described in Schedule – A of the plaint.  So far as relief  A-1  was  concerned,  defendant  no.  1  – appellant has been held responsible.”

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13. A  Letters  Patent  Appeal  preferred  thereagainst  before  a  Division

Bench of the High Court has been dismissed as being not maintainable.   

14. Mr. M.P. Jha, learned counsel appearing on behalf of the appellant,

would  contend  that  the  courts  below  committed  a  serious  illegality  in

passing  the  impugned  judgments  insofar  as  they  failed  to  take  into

consideration the letters issued by the appellant to the defandant No. 3 –

Bank for taking away the movable properties and in that view of the matter

the appellant cannot be said to be guilty of any negligence.

The learned counsel pointed out that damages awarded by the learned

Trial Court on two counts, as would appear from prayers A and A-1 of the

plaint are not maintainable.  He, however, fairly conceded that the decree

passed in respect of prayer A-1 stands satisfied.

15. The learned counsel on behalf of the respondents, on the other hand,

would support the impugned judgment.

16. Sections 29 and 30 of the Act read as under:

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“29.  Rights  of  Financial  Corporation  in  case  of default - (1) Where any industrial concern, which is  under  a  liability  to  the  Financial  Corporation under  an  agreement,  makes  any  default  in repayment  of  any  loan  or  advance  or  any instalment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement  with  the  Financial  Corporation,  the Financial Corporation shall have the right to take over the management or possession or both of the industrial concern, as well as the right to transfer by way of  lease or  sale  and realise  the  property pledged,  mortgaged,  hypothecated  or assigned to the Financial Corporation. (2) Any transfer of property made by the Financial Corporation, in exercise of its powers under Sub- section (1), shall vest in the transferee all rights in or to the property transferred as if the transfer had been made by the owner of the property.  (3) The Financial Corporation shall have the same rights  and  powers  with  respect  to  goods manufactured or  produced wholly or partly from goods forming part of the security held by it as it had with respect to the original goods.   (4) Where any action has been taken against an industrial  concern  under  the  provisions  of  Sub- section (1), all costs, charges and expenses which in the opinion of the Financial  Corporation have been properly incurred by it as incidental thereto shall  be  recoverable  from the  industrial  concern and the money which is received by it shall, in the absence of any contract to the contrary, be held by it in trust to be applied firstly, in payment of such costs,  charges,  and  expenses  and,  secondly,  in discharge  of  the  debt  due  to  the  Financial Corporation  and  the  residue  of  the  money  so received  shall  be  paid  to  the  person  entitled thereto.  

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(5) Where the Financial Corporation has taken any action  against  an  industrial  concern  under  the provisions  of  sub-section  (1),  the  Financial Corporation shall  be deemed to be the owner of such  concern,  for  the  purposes  of  suits  by  or against the concern, and shall sue and sued in the name of the concern. 30.  Power  to  call  for  repayment  before  agreed period.  Notwithstanding  anything  in  any agreement  to  the  contrary,  the  Financial Corporation may, by notice in writing, require any industrial concern to which it has granted any loan or  advance  to  discharge  forthwith  in  full  its liabilities to the Financial Corporation,--  (a)  if  it  appears  to  the  Board  that  false  or misleading information in any material  particular was  given  by  the  industrial  concern  in  its application for the loan or advance; or  (b) if the industrial concern has failed to comply with  the terms of  its  contract  with  the Financial Corporation in the matter of the loan or advance; or  (c) if there is a reasonable apprehension that  the industrial concern is unable to pay its debts or that proceedings for liquidation may be commenced in respect thereof; or  (d)  if  the  property  pledged,  mortgaged, hypothecated  or  assigned  to  the  Financial Corporation as security for the loan or advance is not  insured  and  kept  insured  by  the  industrial concern  to  the  satisfaction  of  the  Financial Corporation  or  depreciates  in  value  to  such  an extent  that,  in  the  opinion  of  the  Board,  further security to the satisfaction of the Board should be given and such security is not given; or  (e)  if,  without  the  permission  of  the  Board,  any machinery,  plant  or  other  equipment,  whether forming  part  of  the  security  or  otherwise,  is removed  from  the  premises  of  the  industrial concern without being replaced; or  

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(f) if for any reason it is necessary to protect the interests of the Financial Corporation.”  

17. A bare perusal of the aforementioned provisions would clearly go to

show that the statutory power vested in the Corporation must be exercised

only in respect of the properties which were mortgaged.  This aspect of the

matter has been considered by this Court in  Ormi Textiles and Another v.

State of Uttar Pradesh and Others [(2008) 5 SCC 194], holding:

“15. For the purpose of invoking Section  29 of the Act, the borrower must have a liability to the Corporation under an agreement.  It  must make a default in repayment of any loan or advance, etc. The Corporation in such a situation shall inter alia have  the  right  to  take  over  the  management  or possession or both of the industrial concerns. This power is in addition to the power of the right to transfer  by way of  lease  or  sale  and  realize  the property  pledged,  mortgaged,  hypothecated  or assigned to the Corporation. The right to transfer by  way  of  lease  or  sale,  however,  is  not  an independent right. Only in case of default, such a right can be exercised. We must keep in mind that the powers contained in two parts of Section 29 of the  Act  are  separate  and  distinct.  The  power  to take over the management is ordinarily exercised when the concern is an ongoing one. But, when a power is conferred to sell the property unilaterally, the same must have a nexus with the mortgaged property.  The  power  to  sale  cannot  be  read  in isolation.  It  can  also  realize  the  mortgaged property which would mean that when a property had been sold, only the mortgaged property can be

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realized and not any other property which was not the  subject  matter  of  mortgage.  What  can  be transferred by the mortgagee even in terms of the provisions of the Transfer of Property Act is the property which was the subject matter of mortgage and  not  any  other.  A  power  to  take  over  the management or possession is a statutory power. As and  when  the  debt  is  realized,  the  Corporation would be bound to handover the management or possession  of  the  property,  as  the  case  may be, back to the industrial establishment.  

16. A mortgagee can have a right to sell a property even  under  the  contract.  The  same  must necessarily mean that the property to be sold is the one over which he has the right, title and interest. A sale without any right would be a nullity.

17.  For  proper  construction  of  the provisions  of the Act, we may notice the provisions of Section 31 thereof.  It  provides  for an additional  remedy. Whereas  Section  29 confers  a power to  sale  the property unilaterally, Section 31 provides inter alia for the same power only through the intervention of the court.  

18. Clause (a) of Sub-section (1) of Section  31 of the Act categorically states that the jurisdiction of the District Judge can be invoked for order of sale  of  the  mortgaged  or  assigned  property  in favour  of  the  Corporation.  Clause  (b)  thereof provides  for  transferring  the  management  of  the industrial  concern.  Clauses  (aa)  and  (c)  of  Sub- section (1)  of  Section  31 of  the Act provide for additional remedies. When an application is filed in terms of Section  31 of the Act, the procedures laid down in Sub-section (1A) of Section 32 of the Act  are  required  to  be  followed.  A  further

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additional  remedy  has  been  provided  to  a Financial Corporation in terms of Section  32G of the Act.”

18. In that view of the matter, there cannot be any doubt whatsoever that

the appellant did not have any right to sell any property which was not the

subject  matter  of the deed of mortgage.   Any action taken in that  behalf

must  be  held  to  be  wholly  illegal  and  without  jurisdiction.   Appellant,

therefore,  was liable for payment of damages as had been opined by the

courts below.

19. We may, furthermore notice that the appellant has not placed before

us the amended plaint.  Whereas prayer A relates to Schedule A, prayer A-1

relates to Schedules B, C and D appended to the plaint.  We have not been

informed as to what these Schedules were about.  Schedule ‘A’ appended to

the plaint, however, reads as under:

“SCHEDULE A

1. As  per  stocks  statement submitted  to  State  Bank  of India,  Main  Branch  Court Compound,  Ranchi  on 31.3.1982

Rs. 1,30, 161.64

2. Cost  of  10,808  MT  of  coal Tar Pitch @ Rs. 4200/- PMT

Rs. 45, 393.60

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3. Cost  of  190  bags  of  Pilla Miiti @ Rs. 20/- per bag

Rs. 3,800.00

4. Cost  of  1.5  MT of  Graphite powder @ Rs. 1,000/- PMT

Rs. 1,500.00

5. Cost  of  4000  Nos.  1st Class bricks @ Rs. 320/- 1000 Nos.

Rs. 1,280.00

6. Cost  of  channels  Angles  etc. 500 Kg. @ Rs. 5,000/- PMT

Rs. 2,500.00

7. Cost of 1.5 MT Iron Nails @ 2,000/- PMT

Rs. 3,000.00

Total: Rs. 1,87,635.24 p”

20. It is accepted at the bar that the aforementioned movable properties

stood mortgaged in favour of the respondent No. 3.  It has furthermore not

been denied or disputed that the respondent No. 3 – Bank had not initiated

any action for realisation of its dues.  Probably, it could not do so because of

the pendency of the instant case and one of the claims made by the plaintiff

was also directed against the Bank.

21. We, therefore, with a view to do complete justice between the parties,

are  of  the  opinion  that  the  movable  properties  hypothecated  to  the  bank

having not been realized and as it was permissible for it to remove the same,

the decretal amount in regard to prayer A should be held to be payable to

the State Bank of India – the respondent No. 3.  We direct accordingly.  The

decretal  amount  may  be  paid  by  the  appellant  to  the  respondent  No.  3

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together  with interest  as  directed  by the  courts  below within six  months

from date failing which it will be open to the bank to execute the decree.  

22. The appeal is dismissed with aforementioned directions.  However, in

the facts and circumstances of the case, there shall be no order as to costs.

………………………….J. [S.B. Sinha]

..…………………………J.     [Cyriac Joseph]

New Delhi; December 12, 2008

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